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Sunday, December 7, 2008

Call it a Christmas gift or ushering in a feel-good factor, the Government on Friday announced a cut in auto fuel prices.

Passing on the benefit of steep fall in international crude prices to the consumers, retail selling price of petrol has been cut by Rs 5 a litre and diesel by Rs 2 a litre.

The prices of cooking fuels were, however, left untouched.

Speaking to newspersons after a meeting of the Cabinet Committee on Political Affairs (CCPA), the Petroleum Minister, Mr Murli Deora, said, “to protect the interests of the common man and to pass on the benefit of the fall in international oil prices, the Government has decided, as an interim measure, to reduce the price of petrol by Rs 5 a litre and diesel by Rs 2 a litre with effect from December 6.”

He further said that the Government is closely watching the international oil prices and their impact on the country’s economy, and will take appropriate decisions whenever necessary.

Pressure had been mounting on the Government to cut fuel prices. Since August, crude oil prices had started declining. On December 4, the Indian basket stood at $ 41.53 a barrel, after hitting a high of $ 142.04 a barrel in July.

According to the industry, there were two options before the Government. It could either free petrol and diesel from the administered price mechanism, thus allowing the PSU oil marketing companies (OMCs) to revise the prices in tandem with market conditions or consider a price cut.

When crude was scaling over $ 120 a barrel, the Government had in June increased prices of petrol by Rs 5 a litre, diesel by Rs 3 a litre and LPG by Rs 50 a cylinder. Even then the Government had taken the average crude price of around $ 67 a barrel. The increase had resulted in petrol costing Rs 50.56 a litre in Delhi from Rs 45.56 a litre. In effect, the current cut has neutralised the June petrol hike.

Friday’s price cut would result in a collective saving of about Rs 6,000 crore for auto fuel consumers, while the OMCs will incur an additional burden of Rs 5,300 crore. The OMCs – Indian Oil Corporation Ltd, Bharat Petroleum Corporation Ltd, Hindustan Petroleum Corporation Ltd – at current international prices and with the revised retail prices are projected to incur under recoveries of about Rs 1,10,000 crore for the current fiscal. “A formula would be worked out to deal with the issue of under recovery,” the Minister said.

The OMCs incur revenue loss on petroleum products, as they sell them at controlled price. They started earning positive margins from November on petrol and diesel. The companies were making Rs 14.89 a litre profit on petrol and Rs 3.03 a litre on diesel. However, they continue to lose Rs 16.60 a litre on kerosene and Rs 142.67 on an LPG cylinder.

Apart from incurring losses due to selling products below the market price, there have been additional factors adversely affecting the financial health of OMCs. The factors include high interest burden due to heavy borrowings at high interest rates, foreign exchange losses due to rupee depreciation, inventory losses, and drop in gross refining margins.